AHG profit downgrade on weak auto sales

Key Points

All eyes are on AP Eagers annual general meetng on Wednesday after ist takeover target AHG downgraded profits.

AHG blamed the weak new vehicle sales market and a soft performance from its ailing refrigerated logistics business.

Shares in a third ASX-listed car dealership firm, Autosports Group, are wallowing at less than half the issue price of $2.40 in a $160m float in 2016.

Takeover target Automotive Holdings Group has warned profits for 2018-19 will be weaker than expected because of a downturn in new car sales and a soft performance from the refrigerated logistics business it is trying to sell.

The downgrade, amid an extended slump in new vehicle sales across the industry as consumer confidence is hit by falling house prices and pre-election jitters, raises questions about whether predator AP Eagers might do the same at its annual meeting on May 15.

AP Eagers CEO Martin Ward and Automotive Holdings Group CEO John McConnell are both battling a weak new vehicle sales market. David Rowe

A merged AP Eagers and AHG would create a market leader in new vehicle dealerships with almost 12 per cent of the sector and have 229 new car dealership locations in Australia. The deal still requires the approval of the Australian Competition and Consumer Commission.

AHG said on Tuesday that operating net profit after tax was now likely to be about $50 million, compared with the guidance of between $52 million and $56 million outlined in February.

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AP Eagers declined to comment on Tuesday on whether its own trading performance had been hit by the extended downturn. Official figures from the Federal Chamber of Automotive Industries in early May showed that new-vehicle sales had dropped across the industry by 8.9 per cent in April.

The April fall to 75,550 new vehicles sold by dealerships around the country compared with 82,930 in April 2018. This marked the 13th consecutive month that sales were lower than at the same time a year earlier.

Morgan Stanley analyst Bradley Ablett said in a note on Tuesday that Saturday’s federal election could place further risk to the new profit guidance given by AHG because May and June are historically high profit months.

Mr Ablett said it would have limited impact on the AP Eagers bid and the offer should continue to be supported by both sets of shareholders because of the substantial synergy opportunities from putting the companies together.

Writedowns warning

AHG also warned there may be more writedowns in the refrigerated logistics business, with a review under way of the carrying value of receivables for 2018-19 and previous years.

The trading performance of the business in April had been soft, it said.

AHG almost sold the troublesome refrigerated business last year to Chinese group HNA for $400 million but that deal fell over after the Chinese conglomerate suffered cash-flow problems.

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Morgan Stanley estimates the value realised by AHG in a renewed sale process for the refrigerated logistics arm could be between $160 million and $300 million.

In mid-February, AHG slashed the carrying value of its businesses by $226 million, with a writedown of $147 million made on the automotive dealerships and $79 million on a refrigerated logistics arm.

Rich Lister Nick Politis is the biggest shareholder in AP Eagers, with 36.3 per cent of the company. Mr Politis is also the chairman of the Sydney Roosters in the National Rugby League.

A smaller ASX-listed car dealership company, Autosports Group, has been under severe pressure also, with its shares wallowing at $1.13, less than half the issue price of the November 2016 float, which raised $160 million.

It operates 23 vehicle dealerships mainly selling prestige brands including BMW, Audi and Volvo, along with two crash-repair outlets and two used car dealerships.